Remember when politicians told us not to worry about a housing bubble, and a few smart investors made huge profits by betting against them?  Well, it is deja vu all over again.  While the most vocal politicians argue today that renewable energy will never be viable, the smart money is betting that they are wrong again.

Warren Buffett is a major investor in the largest wind power portfolio in the United States, the largest electric vehicle (EV) manufacturer in China, and one of the the largest solar power plants in the world.  Munich Re, the largest reinsurance company in the world, has invested in a solar power company with 168 megawatts up and running and another 500 megawatts in the pipeline.  Other smart investors making big bets on sustainable energy include Kohlberg Kravis & Roberts (KKR) and Goldman Sachs.

The arguments supporting these massive investments in sustainable energy today are just as simple and logical as the arguments supporting bets against the housing market were in the recent past.  If you own a traditional power plant, your fuel costs for coal, natural gas, or oil will inevitably rise in price over the 50 to 100 year life expectancy of the power plant.  If, however, you invest in wind, solar and other forms of sustainable energy, your fuel costs will remain at zero for the next 50 to 100 years.  This creates a built-in cost advantage for sustainable energy that becomes ever more valuable every time fossil fuel prices increase.

So, who will benefit from the tremendous cost advantages of sustainable energy over time?  Again, we are facing a case of deja vu all over again.  The way we are headed right now, almost all the benefits of sustainable energy will go to a very small group of smart investors.  Here's why.

Let's assume that we meet our national goal of having 80% of our electricity generated by fossil fuels and 20% generated by renewable sources in the year 2020.  With that type of lopsided ratio, the market price for electricity will be heavily influenced by the cost of fossil fuels.  The relatively small contribution of renewable energy sources will not lower prices much for consumers.  As a result, the investors who own renewable energy power plants will reap outsized profits by selling electricity at prices that are driven by fossil fuel costs and producing that electricity with zero fuel costs.  The consumer will get very little price benefit from 20% renewable energy.

Now let's assume that 100% of our electricity will come from renewable sources in the year 2020.  Under this scenario, electricity prices will be set in a competitive market where all of the power producers having zero fuel costs.  Since all power producers will be competing against other power plants that also have zero fuel costs, the price consumers pay for electricity will drop (or at least not rise as quickly).

Can we really build enough renewable energy to make a difference over the next eight years?  Yes.  The United States has pulled off similar feats in the past, which is why we dominated the global economy in the 20th century.  In the seven years between 1938 and 1945, we built 663,000 military aircraft, 155 aircraft carriers, and 10 million tons of concrete runways in the course of winning World War II.  In the 1950's, we built more miles of highways than the rest of the world combined.  In the 1960's, it took us only eight years to develop the necessary technologies to put a man on the moon.  If we set our minds to it, we can produce more renewable energy, with zero ongoing fuel costs, than the rest of the world combined.  And if we do that, we will create a more competitive economy that is capable of creating more jobs and lower electricity costs for everyone, instead of a small renewable energy industry that creates higher profits for just a few.

Let me admit that I have oversimplified how electricity prices are set in competitive markets.  Yes, I know that electricity markets are incredibly complex, that we must take into account differences in costs and prices for base load vs peak power generation, that prices for renewable electricity must allow investors to recover their capital costs plus attractive profits, and that producing more renewable energy will require breakthroughs in storage technologies and/or significant investments in smart grids.

All I am saying is that we must not lose sight of the forest for the trees.  In the years leading up to the Great Recession, we allowed the complexities of derivatives markets to distract us from the simple fact that too many mortgages had been financed for people who could not afford them.  We must not let the complexities of electricity markets distract us from the simple fact that more renewable electricity will provide benefits for everyone, while small amounts of renewable electricity will only provide benefits for the few. 

Once we accept the simple fact that we must invest in more renewable energy, we can move on to the more complex question of how to get that done.  That's what FDR did when he led us to victory in WWII.  That's what Dwight Eisenhower did when he built the Interstate Highway System.  And that's what JFK did when he set us on course to put a man on the moon.

John J.P. Howley
Woodbridge, New Jersey


 


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